The break-up of Fiat Chrysler gathers pace

15 November 2018 | Ian Henry

A couple of years ago, Ferrari became an independent quoted company, separate from Fiat Chrysler. This was followed by the separation of CNH Industrials, the holding company for Iveco Trucks. Now Fiat Chrysler has spun off its components activity, Magneti Marelli, to CK Holdings in a deal worth over 6bn euros.

CK Holdings is a part of Calsonic Kansei, a Japanese supplier formed some years ago by the merger of HVAC supplier Calsonic and interiors company Kansei. But this deal is no Asian takeover; CK itself is owned by one of the major private US equity companies, KKR. The merger is a typical “consolidation play”, or in newer parlance “buy and build” deal. The combined Calsonic Kansei Magneti Marelli will have global revenues of over 15bn euros and leading positions in lighting, HVAC and powertrain electronics.

The merger is also part of the continual realignment of the tier one supplier base; Delphi, the former GM subsidiary and once the largest components company in the world, has been broken up; another major tier one, Continental, is looking to do the same. KKR, by contrast, have concluded that big is best, for now at least; KKR will, of course, be looking for a return (i.e. an exit) from this investment, so what happens next will be interesting to observe.

Although there is some technology and customer overlap within the enlarged group, this is not so extensive as to make the deal subject to a complex or lengthy competition enquiry. Magneti’s lighting business, Automotive Lighting, was one of the three leaders in the segment in Europe (alongside Hella and Valeo) but relatively modest in other parts of the world; Magneti also has relatively underdeveloped positions in other component areas, and FCA lacked the financial wherewithal to allow the component sector to develop leading positions in other segments.

Whether KKR will allocate funds and allow the company time to develop some of these business areas remains to be seen; it may well to repackage some of the combined unit and split this is off in turn. The “buy and build” model may well be the first step on the road to dividing the enlarged group up into smaller units, with IPOs for individual businesses, such as lighting, or selling some units off again in sector-specific moves.

Meanwhile, Fiat Chrysler has been urged by one shareholder, ADW Capital Management, to spin off Maserati and Alfa Romeo, to allow the company to focus on its profitable US brands, especially Jeep. While Alfa has certainly been a problem for Fiat for many years, the brand still has untapped potential in the premium market. If the long-awaited new SUVs are well-received, then real value could eventually be realised from the Alfa brand; and the same applies to Maserati, even more so. It is really a question of scale: Alfa needs to get to at least 400,000 upa, with Maserati approaching 100,000, using common platforms; if the brands can do this, then the Alfa-Maserati combination would not be that far off the volumes achieved recently by JLR or Volvo, both off whom have shown that profits can be made in this market (albeit with JLR suffering somewhat recently).

Selling Alfa and Maserati now would not realise anything like their potential value. FCA needs to let the brands’ new models and new market expansion plans come to fruition before divesting, or even considering divesting. Moreover, if it did sell off the premium Italian brands, the logic of FCA retaining the Fiat brand alongside Jeep and Ram would be questionable in the extreme. And then the question would be – who would buy Fiat?